In this issue: Everybody has a plan – until they get hit

Comings and Goings: Many many moves

Risky business at Chelsea Piers: In pursuit of the unsinkable portfolio

Recruiter’s Notebook: CIO Supply and Demand

Peter Taylor, CFO University of California: On the art of board-membership


 Everybody has a plan – until they get hit

Joe Frazier

Some have the moves and the right combinations; but if you can’t take the punches, it don’t mean a thing.

Warren Zevon



Comings and Goings:

Michael Barry: Georgetown gets a rising star

Georgetown University‘s first chief investment officer, Lawrence Kochard, was clearly going to be a hard act to follow. He was an academic economist who could also make money, and he propelled Georgetown up into the select group of over-$1 billion endowments before he left for the University of Virginia in January.

Now they’ve tapped Michael Barry from the nearby University System of Maryland Foundation as their second-ever CIO. He was hired as USMF’s sole investment officer in 2003 at the tender age of 27, then appointed their first-ever CIO in 2005. The endowment now employs five full-time professionals and invests $761 million.

Dr. Kochard’s compensation at Georgetown was $702 thousand in the 2009 fiscal year and Mr. Barry earned $613 thousand at Maryland in the same year (both including bonuses).

I would estimate that Mr. Barry probably signed on at Georgetown for about $650K, including prospective bonuses.

The Maryland endowment prospered on his watch, but Mr. Barry had some on-the-job tutelage. USMF’s strong investment committee has included previous chairman Ken Brody (co-founder of the $10 billion Taconic Capital hedge fund) and current chairman David Saunders (one of Julian Robertson’s “tiger cubs,” founder of K2 Advisors fund of hedge funds, and a former lacrosse star at University of Maryland).

In the 2010 calendar year they delivered 15.1%, beating their own composite benchmark by 7.3% and matching the S&P 500. Even better, they did it with modest month-to-month volatility, earning equity-like returns with fewer thrills. The Q4 2010 report said: “we aim to mitigate our exposure to the downside but still participate in a reasonable percentage of the upside…We outperformed international developed equities by 7% and essentially matched the return of the S&P 500, but with a much smoother path.” Indeed.


USMF’s hedge-fund and real asset allocations (including overlays) did a lot of the heavy lifting, beating their respective benchmarks by wide margins; while equities slightly underperformed. It’s all about the allocation. And it doesn’t hurt to know someone who can really pick hedge-fund managers, like Dave Saunders.

Maryland’s work was noticed way back in 2009, when Mr. Barry was dubbed a “rising star” by Foundations and Endowments Money Manager magazine. That worked out pretty well.

Mr. Barry majored in philosophy at Fairfield University in Connecticut, then learned about portfolio construction while working for Cambridge Associates in 2000-2003, and earned a CFA credential in 2005.

USMF investment staff works in DC, where Mr. Barry resides with his wife and daughter; so it’s a stress-free move involving no movers.


Ken Frier: A surprise departure from Stanford

In a surprising move, Ken Frier has just left the chief investment officer post at the $14 billion Stanford University endowment (i.e., the Stanford Management Company).

No one is talking about why: not Stanford and certainly not Ken. He was kind enough to return my call after the announcement, but responded only that he had nothing negative to say about Stanford or about his boss, SMC chief John Powers. And he said he’s looking forward to his next professional challenge, wherever that might be.

Ken imparted nothing to me about the whys and wherefores, but we are all free to note certain obvious points.

One is that the Stanford CIO slot stood empty for a long time before Ken was hired: thirty long months elapsed between the departure of previous CIO Eric Upin in February, 2008 (to join VC firm Sequoia Capital, and now at Makena Capital Management) and the arrival of Ken Frier in August, 2010. It would have been a challenging job-search, but it shouldn’t have taken more than about six months. It shouldn’t, that is, if anyone was actually searching and doing it with any sense of urgency.

SMC’s CEO John Powers publicly rejoiced when Mr. Frier was hired, noting how he had skillfully maneuvered Hewlett-Packard’s pension portfolio through the 2007/2008 meltdown. Mr. Powers then permitted him to slip away after just nine months on the job.

It’s true that Stanford fared pretty well in fiscal year 2010, with the CIO office empty and Mr. Powers in charge. They returned 14.1 percent, surpassing peers Harvard (11%) and Yale (8.9%).

It’s also true that some comparable organizations have made do with a single boss who functions as both CEO and CIO. Jane Mendillo, President and CEO of the Harvard Management Co, has no CIO in her org chart; the various senior investment officers report directly to her. And at the University of Texas Management Co (UTIMCO), Bruce Zimmerman is formally designated both CEO and CIO.

But if Mr. Powers and/or his board wanted to follow that model at Stanford, then why was Mr. Frier hired in the first place?

I think anyone surveying these facts would wonder just what’s going on at SMC. Maybe the Stanford community and endowment supporters will be wondering, too.


Jeff Scott and Max Giolitti: A Double-act heads back to Seattle

Jeff Scott, highly-regarded chief investment officer of the $40 billion Alaska Permanent Fund, is headed back to Seattle from whence he came two-and-a-half years ago.

On June 8 he informed his boss Mike Burns that he would be leaving in early August. Mr. Burns was clearly surprised, and maybe not very enthused about having to wear the interim CIO hat on top of his executive director duties.

Mr. Scott’s long-time wing-man Max Giolitti, APF’s director of asset allocation and risk, will be leaving with him. Both have landed jobs at Wurts & Associates, a consultant advising $34 billion in institutional assets. Mr. Scott will be the firm’s first CIO and Mr. Giolitti will be director of risk allocation.

Mr. Scott, who earned $348 thousand at APF, will probably make more at Wurts; but Mr. Burns told a reporter he didn’t think salary was the “proximate reason” for the move.

APF has earned 18.8% for the 2011 fiscal year to date (nine months); and an annual 2.6% for three years, which roughly corresponds to Mr. Scott’s tenure.

The Scott/Giolitti team managed a $56 billion absolute-return fund for Microsoft in Seattle, and then led their own hedge fund before going to Juneau.

Mr. Scott does the big-picture stuff, while Mr. Giolitti; with degrees in math, physics, and statistics; is the team’s quant. The results have been noticed: APF won aiCIO magazine’s Innovation award for sovereign wealth funds in 2010; and Institutional Investor handed Mr. Scott an Outstanding Contribution award this year.

We talked to Jeff back in September, and wrote about some of the innovations he was driving.

See: The Skorina Letter No. 18


Wurts CEO Jeff MacLean clearly believes he’s acquiring more than just an asset-allocation team. He thinks he’s acquiring something that can be sold as a proprietary methodology, and which can give his firm an edge in the crowded outsourced-CIO niche.

Jeff has tried to explain to me (and others) his risk-factor-based approach to asset allocation. When he gets settled at Wurts we’d love to see a white paper setting this out in more detail.

Mr. Scott’s departure is a big problem for APF. It will take a lot more than six weeks (and some world-class headhunting) to find a successor of the same caliber at $350K, and who’s also willing to move to lovely but landlocked Juneau, Alaska (urban population:17,311).


Real Desrochers: CalPERS gets Real with private equity

California’s $230 billion CalPERS pension has hired a distinguished Canadian, Real Desrochers, to run its $49 billion private equity portfolio, replacing a tainted predecessor.

The slot has stood empty for nine months, since Leon Shahinian “resigned” last August. Mr. Shahinian had accepted gifts from Leon Black’s Apollo Global Management, and later recommended purchasing a 9% stake.

Mr. Desrochers’ resume includes ten years running PE at CalPERS’ cross-town sister-fund CalSTRS, where he generated an average 17% return in the 2000-2009 decade. He previously worked at Quebec ‘s Caisse de depot, and even did a stint as chief investment officer at the Saudi sovereign wealth fund. CalSTRS reported his “retirement” in 2009, but apparently CalPERS boss Joe Dear has induced him to un-retire.

Mr. Shahinian was paid $500 thousand in 2006 and 2007 per state records. Given the inflexibility of public-pension compensation, I doubt if Mr. Desrochers could demand much more.

Our friend Leo Kolivakis, who blogs at, is a fellow Quebecer who’s known Mr. Desrochers for years and praises him highly.


At CalSTRS, he supercharged the PE portfolio, moving beyond North America to invest globally, trading in the growing PE secondary market, and taking stakes in some PE management companies. In 2006, 2007, and 2008, the CalSTRS PE portfolio returned 28%, 32%, and 11.6%, respectively.

CalPERS has some excellent PE guys already on staff, although many of them are understandably demoralized, and some are looking for other jobs. It’s too bad that a fund of this size can’t seem to develop and promote the talent they already have, not to mention protecting the honest ones from politically-connected grafters. But, given their (entirely self-inflicted) PR troubles, it’s understandable that they might prefer to bring in a pristine outsider.


Li Keping and Gao Xiqing: The party line changes at China ‘s sovereign fund

The chief investment officer at China Investment Corp, the PRC’s $300 billion sovereign wealth fund, is apparently on the way out, or at least up. Gao Xiqing, the golf-playing, Duke University-trained incumbent is due to be replaced by Li Keping, currently vice-chair of the smaller National Social Security Fund. But Mr. Gao, who is already CIC vice-chairman, will probably rise to the CIC’s influential chairmanship.

No official announcement has been made, but the opaque politics of the Communist Party seem to be favoring this change, according to sources talking to Reuters. It may happen ahead of the 2012 party congress, where top leadership jobs get reshuffled.

Sources say that Mr. Li will eventually displace Mr. Gao as both CIO and president, but Mr. Gao will get the top job as CIC chairman, displacing current chair Lou Jiwei.

Mr. Gao was the first Chinese citizen to pass the New York State Bar Exam and for two years after graduating from Duke Law he worked on Wall Street as an associate at Mudge Rose Guthrie Alexander & Ferdon (Richard Nixon’s former law firm). He currently serves on Duke University’s board of trustees.

The fund returned 11.7 percent in 2010.

Mr. Li’s job could get still bigger. The Financial Times has said that the government could hand CIC a further $200 billion in new funding, part of ongoing policy to reduce China’s exposure to U.S. debt and diversify its assets into riskier but higher-yielding investments.


Out and About:

Risky business at Chelsea Piers: In pursuit of the unsinkable portfolio

In May I attended two excellent conferences in New York: one was the aiCIO magazine event down at Chelsea Piers. The other was a name-brand conclave which (since the sponsor decided I was a quasi-journalist as well as a search guy), I agreed not to name.

It was fun to go down and look at Chelsea Piers along the Hudson River on the lower west side of Manhattan.

Long ago, this is where the great passenger liners docked and where the rich and famous embarked to cross the Atlantic in style. It’s where the Titanic was headed in April, 1912, when things went terribly wrong. The survivors arrived here at Pier 54 aboard RMS Carpathia. A lot of history.

Loss of Titanic was a human tragedy, but also the biggest marine insurance loss in history up to that time. Still, not a single insurer went broke. She was a $7.5 million asset on the books of the White Star Line (that’s 1912 dollars, of course; today, maybe a billion or more). $2.5 million was uninsured loss absorbed by the owners, the other $5 million was laid off on dozens of underwriters. Even without benefit of modern portfolio theory, they were properly diversified, with no single firm accepting more risk than they could handle. The system took the “impossible” event in stride.

Of course, they were just old-time insurance guys who knew what they were doing, not like the geniuses who ran Lehman, Fannie or Freddie.

Today, Chelsea Piers is a 28-acre development with pools, tennis courts, golf club, parks, and high-end venues like the one used by the aiCIO conference.

What I heard at both conferences was a lot of talk about “risk” and “uncertainty.” It sounded like a lot of people playing defense; not so many expecting calm seas and prosperous voyages.

I listened dutifully to what all the eminences had to say. But I’m not actually responsible for investing anybody’s money (except, of course, for the vast Skorina family holdings), so I often find myself listening more to the music than to the words. And, I was definitely not hearing a triumphant anthem in a major key.

They’re all pros and they’ve all navigated through a lot of financial weirdness. But they were worried. Equities were up in mid-May, but the economic “recovery” feels just barely ambulatory, and they’re all waiting for some very big shoes to drop. Someday soon Greece is going to stiff its creditors in some shape or form and the consequences are hard to foresee. Someday soon, too, Dr. Bernanke is going to stop buying all that Treasury debt and steer the good ship QEII into drydock. What then?

No doubt there are still opportunities out there, as always, but they won’t be found by following the crowd. The feeling was that the crowd is very likely going to take a beating.

Since they are pros, and this isn’t daytime TV, the conferees didn’t talk about their feelings. Instead they talked about new and better ways to deal with “risk,” “uncertainty” and lurking “Black Swan” financial shocks.

Vanessa Drucker, a writer for UK’s Fundweb, attended still another New York conference a couple weeks after I was in town: the Aberdeen Asset Management Forum. There, the hosts took the pulse of the attendees.

“How would you describe the US economic and financial positions relative to the rest of the world?” They asked. The (rounded) responses came back:

Getting Worse: 47%

Getting Better: 16%

Stable: 26%

In Permanent Decline: 11%

This pretty much quantifies what I was intuiting at my conferences. As the lady wrote: “Yikes!”

Oh, and how many did NOT expect American lawmakers to come up with a credible, sustainable plan for deficit reduction? Anyone? Bueller?

Their response was:

Don’t Expect a Plan: 79%

That sounds about right to me.

And now it turns out that our historical memory about financial crises is all wrong. When economists Rinehart and Rogoff mined the data, those “rare” events stood revealed like the rings in a tree-stump: regular occurrences which are almost boringly similar in all countries, in all ages. That’s why this year’s book is This Time It’s Different: Eight Centuries of Financial Folly.

So, what to do about all these perennial but newly re-discovered hazards? First, you de-risk just by being properly diversified. But everybody is already doing that, or at least their consultants say they are. What then?

If a meme like “tail-risk” (and the anxiety it connotes) gets traction, then someone will try to monetize it; in fact, several someones have done so.

There are several ways to do it; e.g., create a basket of derivatives that will perform poorly during normal market conditions but soar when markets plunge.

Mr. “Black Swan” Taleb himself was one of the first to cash in, as advisor to Mark Stiznagel’s Universa fund, which has grown to $6 billion. PIMCO oversees about $30 billion in similar accounts.

Investment theory takes us down some strange roads, but an asset engineered (as some of these are) to lose 15% a year when the market is “normal,” is one of the stranger things I’ve seen. Of course, you can argue that it’s not different from paying an insurance premium. Spending 1% of your assets every year to immunize it against the occasional bad year sort of makes sense. If the product works as advertised.

My friend Bill Ferrell of Ferrell Capital Management has been helping clients hedge against risk for years using a sophisticated strategy which I’m not going to try to describe here. He wrote several pieces for Pensions & Investments, the most recent on May 30th, 2011, Pensions & Investments: Technology is Raising the Curtain on Risk describing his approach.


[Look for “In the Media” on top of the home page, then scroll down to “Press.”]

Now it appears that Bill is going to launch his own “tail-risk” fund. He says that, because his approach is tactical, the client doesn’t have to lose money every year. He claims that in “normal” markets his fund will deliver normal fixed-income returns but when he sees risk on the horizon he will get busy hedging against selected equity benchmarks.

It’s not airborne yet, but if you want to talk to him I’m sure he’d be glad to hear from you.

Some endowments, foundations and pension plans have hired dedicated in-house risk officers to engineer better early warning systems, fine-tune the risks in portfolios, and devise strategies to soften future crashes. One survey from two years ago said that almost half of pensions, endowments, foundations and SWFs now have a chief risk officer. That can’t hurt.

Others are expanding their in-house investment capabilities to include derivatives and option trading to do their own risk-hedging.

At the aiCIO event I talked to Anjum Hussain, director of risk management at Case Western Reserve University. He and his boss, CIO Sally Staley, are now running a small derivatives book to hedge parts of their portfolio. One other big university endowment CIO I spoke to at the conference is doing something similar, but using an off-shore manager to execute the derivative moves.

Of course, if you’re going to start trading derivatives out of the investment office, you’d better know what you’re doing.

Over in the UK, a consultant named Trevor Robinson has published some excellent papers on how pensions can use options and derivatives to reduce some kinds of risk.

His Introduction to Derivatives, in convenient text format is here:

Some of his other papers are here:

He’s aiming more at board members than investment staff. But, if you’re a little hazy on the uses of derivatives, or just want to be able to talk to the pros, this is a good place to get refreshed.

Having your own derivatives-trading book directly under the hand of the CIO has some obvious advantages. First, it gives you more tactical control.

Making fast, precise changes in allocations is hard; it involves time and transaction costs. Theoretically, if you run your own derivatives book, then you can, for instance, quickly reduce your exposure to a certain area (which suddenly looks less golden) by selling futures contracts on that market, while buying futures contracts on a more favored one.

You can thereby separate the stock-picking decision from the market decision. In theory. If you know what you’re doing.

As a bonus, you can even make a little money on the derivatives trades. Maybe even enough to cover the expense of the trader you hire to do this stuff.

Ms. Staley has said that she would rather hedge risk directly using derivatives than through an external long-short fund. It gives her more direct control, and she would rather allocate to global macro funds than to long-short funds, since she believes it reduces correlation to equity markets.

I look forward to talking to Ms. Staley and Mr. Husain in a year or so to see how this is working out in practice.


Q&A: Peter Taylor on the art of board-membership

Peter J. Taylor is chief financial officer of the University of California system; in fact he’s the first and only CFO since the job was created in 2009. Managing the $3.3 billion UC budget is a high-pressure job in these times, as state funding dries up, but Pete is a cheerful guy who seems to take it all in stride.

He comes from a 13-year stint in public finance at Lehman Brothers/Barclay’s Capital, and is also politically savvy, having served for several years as chief of staff to the Majority Leader of the state assembly.

He’s also a veteran of several non-profit boards, which is what I wanted to talk to him about.

Skorina: Peter, how are things on your side of the Bay?

Taylor: Fine, Charles, how are you?

Skorina: Excellent. Peter, I’m looking at a list of all the boards you’ve sat on: Currently you’re a director of the J. Paul Getty Trust, and also the Irvine Foundation. You previously were a member of the UC Board of Regents, and also President of the UCLA Foundation for a couple of years, so you were an ex-officio member of their board. I’ve been talking to people about board governance, especially about how the board and investment committee mesh with the investment office. As both a finance guy and a board veteran, what wisdom do you have to offer?

Taylor: Well, I have noticed some things that work and some that don’t. They’re pretty basic.

Skorina: Like what?

Taylor: All things equal, smaller boards work better. A six-member board works really well. You get up into two digits and it gets harder. I was once involved with a 25 plus-member board, which slows everything down to a crawl.

Skorina: Interesting you should hit on that number. I’ve got some academic research here that says the same thing. A psychologist at Harvard named J. R. Hackman says that a committee shouldn’t have more than six members; above that, productivity drops.

Taylor: Well, if he’s at Harvard, he must be right.

Skorina: Absolutely!

Taylor: It’s kind of an inverse relationship, I think. The bigger the board, the less each member feels personally responsible. You get some people who feel they don’t have to pull their weight, so they don’t.

Skorina: What else have you noticed?

Taylor: The board needs to maintain a little distance from the executive head of the foundation and the professional staff. They each have their job to do, but the board must have “alone” time for their considerations without the staff in the room, to maintain their independence.

Skorina: What makes a good chairman?

Taylor: It’s a real balancing act, but the chair is critical. On the one hand, he has to make sure that everybody gets a hearing so that you can arrive at a real consensus. On the other hand, he sometimes has to be tough about focusing on the agenda and moving things along.

Skorina: I’ve talked to some people about the division of labor regarding hiring and firing external portfolio managers. Some boards seem to be over-involved.

Taylor: The board should be concerned about methodology. They should define the process and make sure it’s working. They should leave the rest to the staff and consultants. In fact, that should be the general rule. They should focus on investment risk parameters and policy. That’s more than enough to absorb all the time they have. The board and investment staff have to develop enough mutual trust so that they can each do their jobs without stepping on each others’ toes.

Skorina: Thanks a lot, Peter.

Taylor: Thank you, Charles.


Recruiter’s Notebook: CIO Supply and Demand

Since I practice my trade – executive recruiting – within a certain niche, I think it’s to everyones’ advantage to try to figure out how big that niche is, especially the sub-niche of tax-exempt chief investment officers.

I once worked out an estimate on the back of an envelope and left it safely in a desk drawer where I wouldn’t have to defend it. But sometimes people ask me just how many CIO jobs there are out there. Funds want to know just how hard it is to find good candidates and job-seekers want to know what their chances are.

I heard variants of those questions several times when I was in New York recently, so I decided to put my back-of-the envelope analysis on the record, for whatever it’s worth.

The short answer is: I think there are about 1,300 jobs for full-time, professional CIOs at tax-exempt funds. And I think the annual turnover rate is about 12 percent, so there are perhaps 160 openings per year.

The supply side is trickier and harder to enumerate, since candidates can be drawn from a wider sphere than just the core pensions/foundations/endowments world. While I can’t offer an absolute number, I have a pretty good idea where the candidates have been coming from in recent years, and in what proportions.

Bottom-line: It’s clearly a buyer’s market, with a half-dozen highly-qualified candidates for each opening, even at the smaller funds. Of course, the real art is matching specific candidates to specific jobs, which is much more than a numbers game.

I have a long version of my analysis showing the math, and I’ll be glad to share it. Just send me an e-mail request to:


Parting Shot:

Fred Buenrostro and CalPERS: Selling out in Sacramento

Skullduggery at CalPERS has been reported here in California for many months, but it struck me as just one more dull, pay-to-play muddle. The gambling at Rick’s Cafe may be going on unabated, but I couldn’t work up much indignation.

Then a recent report rekindled my interest. Even the shabbiest, run-of-the-mill influence-peddling, when closely examined, can be pretty entertaining. CalPERS sponsored a 75-page study by a white-shoe DC law firm which turned up many piquant facts which I had overlooked.


Alfred Villalobos, the former CalPERS board member who profited from steering pension business to his clients, was the central miscreant and has been well-publicized, but the role of former CalPERS CEO Fred Buenrostro had been less clear to me. It’s now plain that he was a wholly-owned subsidiary of Mr. Villalobos who cheerfully sold his office and wasn’t even very clever about how he did it.

Item: Mr. Villalobos paid for Mr. Buenrostro’s lavish wedding at Zephyr Bay, Nevada , and paid his way at Vegas casinos.

Item: One day after Mr. Buenrostro’s departure from CalPERS, he stepped into a $300 thousand job with Villalobos. Compensation included the deed to a condo on Lake Tahoe . He referred to this as “pursuing exciting opportunities in the private sector.”

Item: Mr. Buenrostro sometimes absented himself from his CEO duties in Sacramento to work as a paid ski instructor at Squaw Valley, giving lessons to some of Mr. Villalobos’ employees. There is no evidence, however, that he washed their cars or picked up their dry-cleaning.

Item: Even after the board had – belatedly – stripped him of his CEO authority, he continued to sign documents to assist Mr. Villalobos’ schemes, using phony CalPERS stationery.

Item: After divorcing his wife (see “lavish wedding,” above), Mr. Buenrostro acquired a girlfriend who was employed by one of the private equity companies CalPERS did business with. This worked out poorly for Mr. Buenrostro when both the ex-wife and ex-girlfriend volunteered to tell the lawyers everything they knew about Mr. Buenrostro’s life and times. No subpoenas required.

How this corrupt hack, a bureaucrat with little relevant experience, managed to acquire the top job at CalPERS in the first place may be the most interesting question of all. Unfortunately, neither the lawyers nor his lady friends throw any light on it in this document. Still, it was a good read, and I recommend it to students of pension administration and human nature.

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